Answers to the questions raised in the Clerk's letter of 1 June are set out below. We have also added a note on the anticipated benefits of the UK Medical Ventures Fund to the MRC. There are two key points which the committee might wish to bear in mind in considering how far the MRC experience might be applicable in other sectors.

The industrial sectors which draw on MRC-funded research are comprised of highly innovative and R&D-intensive multinational pharmaceutical companies and "high tech" SMEs—we knock on a relatively easily opened door.

Like other research councils, we have no direct control or responsibility for exploitation of the IP/IPR generated by grants to universities. The process of raising capital for UK Medical Ventures Fund, and the intellectual seeds of its future business, derive entirely from the track record of high-quality research in the 40 research institutes/units where IP/IPR is owned and managed by the MRC through its in-house Technology Transfer Group.

1.  HOW THE NEW FUND WORKS?

(a)  Legal Structure

  The fund, UK Medical Ventures Fund is a 10 year limited partnership under English law. The investors into the fund are the Limited Partners.

  The General Partner, ie the management of the limited partnership, is contracted to UK Medical Ventures Management Ltd (UKMVML), a wholly-owned subsidiary of the Medical Research Council. UKMVML is subject to regulatory control by the Investment Management Regulatory Organisation (IMRO).

  UKMVML has appointed a Board of Directors comprising three experienced (in finance, biotechnology and pharmaceutical industry) independent directors, one representative of the Limited Partners, the CEO of UKMVML and three representatives of the MRC.

  A legally binding agreement between the Fund and the MRC obliges the MRC to work through the Fund when Council chooses to exploit technology it owns and/or controls through "spin-out" company formation. The fund is obliged to invest not less than 75 per cent of its money in companies formed to exploit technology originating in MRC Institutes and Units.

  UKMVML is managed by its Chief Executive Officer, Dr Stephen Reeders. Dr Reeders has a proven "track record" in both molecular genetics research, and more recently in a biotechnology investment position in New York. Dr Reeders has recruited two further Investment Managers.

(b)  Operational processes

  The Committee should understand that UK Medical Ventures Fund is a recent initiative, and working practices are expected to evolve further. The anticipated approach is that the MRC Head Office Technology Transfer Group staff take the lead working with MRC Institute/Unit researcher scientists to identify technology for potential "spin-out" companies. Each opportunity will be made known to UKMVML, which has a six-month exclusive period for development of a satisfactory Business Plan suitable to be financed by UKMVML. UKMVML may choose to involve a second investment fund, but anticipates "leading" investments. If necessary, UKMVML Fund Managers will provide interim management to its portfolio companies. The preparation of the Business Plan includes negotiation between the MRC Technology Transfer Group and UKMVML on the value attributed to the technology, and hence the share holding to the MRC.

  It must be anticipated that UKMVML:

(1)  concur with the MRC/TTG assessment of the "spin-out" company opportunity, develop a satisfactory Business Plan, with agreement on the value to be attached to the technology. In this circumstance, the investment can be completed and a start made to implement the "spin-out" company Business Plan;

(2)  reject the potential investment opportunity as unsuited to company formation. In such circumstances, the MRC is free to exploit the technology through alternative mechanisms;

(3)  agree that the technology provides the basis for a "spin-out" company but that TTG and UKMVML are unable to agree the value of the technology. In such circumstances, the MRC becomes free to seek alternative investment, but is precluded from accepting a materially lesser investment from a third party. In addition, UKMVML is free to improve on alternative offers from other parties.

2.  WHAT LEVEL OF FUNDING?

  UK Medical Ventures Fund has closed at its maximum funding—£40 million, from eight Limited Partners.

  The MRC has made no investment into the fund, beyond the commitment of administrative staff time, to cover certain "out-of-pocket" expenses and the temporary provision of office space, during the formation of the fund. These costs were reclaimed from UK MVML, once money was raised.

3.  MRC'S REASONS FOR ESTABLISHING THE FUND?

  The MRC has a long-standing commitment to exploitation, including "biotech" company formation. Celltech plc, usually considered to be Europe's first biotechnology company was formed specifically to exploit technology from the MRC Laboratory of Molecular Biology. Since that time, a growing number of MRC "spin-out" companies have been formed including Cambridge Antibody Technology plc, Therexsys Ltd, (recently renamed Cobra Therapeutics Ltd), Prolifix Ltd, RiboTargets plc and Cambridge Genetics Ltd. The creation of these companies was, without exception, a protracted, and in our view, inefficient process confirming the widely recognised difficulty to access the first investment round into "spin-out" companies. The primary reason to establish the fund was to enhance the access to see/venture investment for MRC "spin-out" companies.

4.  BENEFITS TO THE MRC

  The creation of UK Medical Ventures Fund is intended to facilitate the MRC objective to participate in "biotech" company formation whenever practical. The Fund provides access to £40 million for company formation, of which at least £30 million must be invested in biotech companies exploiting technology originating within MRC Institutes and Units. In addition, the Fund management structure provides for three highly competent investment managers to be focussed primarily on fostering "spin-out" company formation based on MRC technology.

  The MRC will also benefit directly from the financial success of UK Medical Ventures Fund. In addition to a share holding in each "spin-out" company reflecting the value of each specific technology, the Fund structure includes an incentive to the General Partner through the carried interest principle; the greater the returns to the Limited Partners, the greater the rewards to General Partner. The General Partner, UK Medical Ventures Management Ltd, a wholly owned subsidiary of the MRC, will use the carried interest in part as incentive to its investment management team, and partly as a return to Council. In addition to the conventional participation in the carried interest, the MRC will receive a further benefit in the form of an additional five per cent carried interest, in recognition of the privileged position of UK Medical Ventures Fund to technology from MRC Institutes and Units.

29 June 1998